Business Risk
Business Risk Businesses can lose just as people can You go to the barbershop for a haircut, you risk wasting your money on a disappointing cut The barbershop, on the other hand, risks losing the resources it has invested if you demand a refund If you share your dissatisfaction with other members of the community, the barbershop risks losing additional customers
Definition Business risk is the probability of loss (failure) or gain (success) inherent in conducting business Although business risk can include the possibility of gain, the chance of gaining is never separate from the possibility of losing (hence, the risk) With free enterprise, business people have the right to risk everything: they can lose it all or they can make a fortune Effectively managing risk helps a business to be successful
Business Risk Businesses need to know the risks they might face – and what influences those risks Classifications of risk Economic risks Changes in the market that cause prices to go up or down, products to change, and businesses to succeed or fail Can happen when customers select (or change their minds about) what they want to buy
Economic Risk Types of economic risks Competition The economic risks involved in keeping up with (and outperforming) business competitors are significant
Economic Risk Shifts in Consumer Demand Sometimes, customers’ needs and wants change
Economic Risk Obsolescence Advances in technology play an important role in economic risk
Economic Risk Government intervention Revenues – and profits – are affected by what governments require
Economic Risk Business conditions The environment within which a business operates can affect it economically, on a large or small scale
Natural Risk Natural risks - Result from natural causes such as floods, tornadoes, fires, lightning, blizzards, and earthquakes Weather conditions are a natural risk for many products and businesses Specific weather conditions can affect certain geographic area more than others Another natural risk is perishability Fresh produce and other perishable goods will eventually rot or spoil – some faster than others
Human Risk Human risk - Caused by human weakness and the unpredictability of employees and/or customers Most common types of human risk Dishonesty Carelessness Incompetence Possibility of accident or illness
Pure Risk & Speculative risks Distinguishing between pure risks and speculative risks All businesses risks are either pure or speculative risks Pure risks bring the possibility of loss or no loss A tornado may or may not strike your building Speculative risks bring the possibility of loss, no change, or gain Operating a business results in earning money, breaking even, or going bankrupt Although businesses can buy insurance for pure risks, insurance companies do not insure speculative risks Because of this, businesses regularly encounter risks that cannot be insured against
Pure vs. Speculative Risk Businesses go forward with a risky action if it’s worth the risk When businesses proceed with a risky action, they handle the risks involved in one of four basic ways Avoiding risk Preventing/controlling risk – safety, security, employee incompetence, product selection, credit Changes – population trends, political events Weather extremes – hurricanes
Risk-transfer Methods Transferring risk Certain risks may be reduced or eliminated by transferring (or shifting) those risks to another person or business This option enables businesses to move forward with their decisions without bearing the risks involved These businesses use a risk-transfer method such as: Entering into a contract – an agreement between two or more people of businesses; on party provides the product, the other pays something in return
Risk-transfer Methods Common contractual agreements for transferring risk are: Guarantees/warranties Surety bonds Rental agreements PoB
Risk-transfer Methods Selecting a particular form of business ownership – how the business is organized can affect the risks that business owners bear Three types of business ownership - Sole proprietorship, Partnership, Corporation
Risk-transfer Methods Purchasing insurance – probably the most frequently used option for transferring risk; examples of insurance are: Property Transportation Robbery or theft Personal injury
Retaining Risk Retaining risk – in some instances, businesses may keep, or retain, the risk involved in doing business Some businesses may do nothing to reduce or eliminate a risk business the business: Is unaware of the risk Underestimates the risk Feels the risk is too small Believes there’s a chance of return